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FATF Publishes Review of Revised Standards on Virtual Assets and Service Providers

The Financial Action Task Force (FATF) has published a review of its revised standards on virtual assets and virtual asset service providers, highlighting ongoing trends in money laundering and terrorist financing risks associated with cryptocurrency.

Regulatory Arbitrage Remains a Concern

According to the report, regulatory arbitrage remains a significant concern. The uneven global implementation of the revised standards leads to a large number of weakly compliant or non-compliant jurisdictions. Additionally, misuse of virtual asset service providers (VASPs) and custodian-encrypting service providers (CESPs) that do not comply with regulations, as well as misuse of tools and methods to increase anonymity, are also major concerns.

Implementation of FATF Standards

As of April 2021, only 58 out of 128 jurisdictions had taken necessary legislative measures to implement the FATF standards. Six jurisdictions prohibit VASP operations. Furthermore, only 29 jurisdictions have conducted on- or off-site inspections, and 18 have administrative sanctions in place.

Misuse of Virtual Assets for Anonymity

The report notes that methods such as tumblers and mixers, Anonymity Enhanced Coins (AECs) and Privacy Coins, privacy wallets, chain hopping, dusting, and use of decentralized applications (DApps) and decentralized exchanges (DEX) are being used to conceal transactions. The misuse of virtual assets for anonymity is a growing concern.

CoinJoin and Peer-to-Peer Transactions

The report highlights the increasing popularity of CoinJoin, a method of hiding transaction relationships by pooling coins and comingling multiple transactions into one. The FATF warns that the shift towards peer-to-peer (P2P) transactions could lead to increased illicit activity, with P2P transactions currently making up around 50% or more of all bitcoin transactions.

Conclusions

However, the report concludes that there has been no significant increase in P2P transactions since the finalization of the FATF standards in 2019. The FATF recommends that jurisdictions prioritize early adoption of its standards to address P2P risks.

Recommendations

The Financial Services Agency (FSA) emphasizes the importance of continued monitoring and measures such as surveillance to detect and prevent illicit activity. The report also highlights the need for close monitoring of stablecoins and other widely adopted crypto-assets in the future, as they could potentially undermine the current approach of reducing risk at on- and off-ramps to the traditional fiat economy.

Red Flag Indicators

The FSA has long provided red flag indicators related to these cases, and has received reports on the number of cases identified by CESPs. The agency emphasizes the importance of continued monitoring to detect and prevent illicit activity.